A story in Reuters signals that China is willing to soften its stance on rare earths. But of course, it has no reason to offer such a concession for free. The article indicates that China wants its trade partners to back off on their pressure on China to curb its abuses of international trade rules.

One of the problems with our international trade arrangements is that trade agreement participants tolerated a certain level of cheating. No one minded much when everyone seemed to be benefitting overall when global growth rates were good. Now with expansion more sluggish, the eurozone under stress, and the US mired in high unemployment, many nations are feeling less charitable towards practices that are not kosher under various international agreements. The problem is that having tacitly approved of these actions in the past makes it hard to secure changes in behavior.

China has come under pressure for its refusal to budge on some of its questionable practices, such as maintaining a currency peg at an artificially low level relative to that of many of its major trade partners. China’s latest trial balloon is that it want to trade some free passes on this front for easier access to so called rare earths, on which is has a stranglehold. Per Reuters:

China may be willing to soften the impact of its cuts in exports of rare earth elements on firms around the world that depend on them to make high-tech and defense products…a Chinese diplomat indicated China could be open to discussions on the issue.

“We are open to an amicable solution,” the Brussels-based diplomat told Reuters, speaking on condition of anonymity.

“We are happy to continue a sustainable supply.”

A European diplomat also said there were early indications China was willing to soften its approach on rare earth export quotas…

But China has indicated it will not ignore European Union moves to penalize China’s state subsidies and cheap loans to manufacturers.

“We should be very careful and try and avoid large-scale trade frictions,” the Chinese diplomat said. “Subsidies are a very contentious issue.”

I’d like to know whether heads have rolled at any defense ministries over the rare earths issue. It’s one thing for businesses to be short-sighted, but sourcing of critical materials for weapons, and now systems, manufacture has long been a concern of military planners. Yet we’ve heard nary a peep of recrimination over this major blunder. I wonder why.

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In times of crisis, the powerful close ranks. The governments know the jig is almost up, and that is why you will rarely see any recriminations prior to the upcoming denouement. It is the same reason we have seen no real prosecutions of the banksters so far (in stark contrast to the S&L catastrophe). Information travels fast nowadays. Any heads rolling, even deeply internal, would signal the idea that something unfortunate might be on the horizon. Unlikely we will see any of that before we see *a lot* of that. Pettis’ recent blog is on point. The end of the credit bubble is coming, and denial on the part of the governments is the surest sign of that.

From 1500 to 1800 the West underwent such a major paradigm change. It transitioned from rule by landed aristocrats, where Christianity provided the integrative economic ideology (feudalism), to rule by wealthy capitalists, where Modernism provided the integrative economic ideology (classical liberal economic theory or capitalism).

In the absence of some unforeseen Black Swan event, the end of plentiful and cheap energy or other limiting factors imposed by the biosphere will undoubtedly spell the end to the current paradigm.

But even without these limitations capitalism was bound to be put to a second major test. The first test occurred in the period 1860 to 1945. Upon reaching almost unchallenged dominance towards the end of the 19th century, capitalistic dogma was put on trial by powerful alternative ideologies which emerged to counter some of its worst abuses. In Russia this took the form of Communism. In the United States it took the form of liberalism or progressivism (The “Great Switch” in the use of the word “liberal,” which was originally used to refer to a set of tenets including classical liberal economic theory, has caused no end of confusion.). Capitalism survived both these challenges. Communism is dead. And liberalism/progressivism is on its deathbed.

So we’ve come full circle back to the situation that existed towards the end of the 19th century. There’s nothing to keep capitalism in check, and we’re once again staring capitalism’s unbridled rapaciousness straight in the face. It’s not a stable situation.

So what happens now? What ideology will arise in the wake of the unchecked abuses of capitalism?

Conservatives clamor for a return to feudalism. And maybe there’s some merit to this. Capitalism, Communism and liberalism/progressivism, unlike feudalism, all rely upon a powerful central government. So maybe some devolution of power to the local level is in the cards. But even though conservatives favor a smaller state, they also favor a stronger state. A medieval order is authoritarian and undemocratic, and individual autonomy would be highly constrained. In a medieval regime the people can hardly be classified as “free.”

Libertarians, like the conservatives, also favor a smaller state. But unlike the conservatives, it is a weak state, and can even embody the concept of the imperial self where each individual is sovereign unto himself. As Amitai Etzioni points out in The New Golden Rule, “Libertarians take an important truth, that freedom is essential to human dignity, and stretch it until it becomes a falsehood.” “The rise of the counterculture in the 1960s,” he goes on to explain, “was followed in the 1970s, and especially in the 1980s, by a strong endorsement of a different, instrumental brand of individualism.” It provided a normative seal of approval to focus on the self rather than on responsibility to the community, and saw in self-interest the best base for social order and virtue. Books such as Looking Out for Number One and How to be Your Own Best Friend, which assert that “we are accountable only to ourselves for what happens to us in our lives,” became popular. Milton Friedman and Peter Drucker argued that the business of business was business and it therefore had no social obligations.

As Etzioni goes on to point out, “Individualism in social science is not a passing fad or a small branch. Much of neoclassical economics, especially in the United States, is individualistic; so are public choice theory in political science, exchange sociology and a significant part of legal studies (law and economics).”

Liberals/progressives and socialists, unlike conservatives and libertarians, do not favor a smaller state. But their ideologies are beset by their own set of problems. Lawrence Goodwyn offers this dismal assessment in The Populist Moment:

Unlike Jefferson, of course, Populists were not dedicated to small government because they believed such an entity could not cope with the power of concentrated capital. Rather, Populists sought democratic government, as Jefferson himself had.

Populist theory poses the central twentieth-century political question: can large government be democratic? The history of twentieth-century industrial societies indicates not—-at least not within the prevailing conceptual limitations of traditional capitalism and socialism. Unfortunately, the idea that workable small-unit democracy is possible within large-unit systems of economic production is alien to the shared presumptions of “progress” that unite capitalists and communists in a religious brotherhood. So much so that the very thought tends to give people a headache. Intellectual short-circuits crackle everywhere. The topic, therefore, is not one the young are encouraged to speculate about; such a possibility challenges our settled resignation and puts people ill at ease. It is simpler to sustain one’s morale by teaching the young not to aspire too grandly for too much democracy.

The conclusion is transparent: the intellectual range of modern industrial societies is quite narrow. One observes that this conclusion is avoided by participants in the mainstream of capitalist and socialist societies because, to do otherwise, in sophisticated circles, is not career oriented and, in unsophisticated circles, is unpatriotic. On the historical evidence, it seems possible to conclude that Mark Hanna and Henry Vincent (for different reasons, of course, since Hanna was not a democrat) would have understood these dynamics without too much psychic strain. On the other hand, it seems probable that William Jennings Bryan, in his provincial innocence, would not have understood. Bryan may be seen, therefore, to be one of the participants in Gilded Age public life who most nearly resembles “modern” political figures.

“It’s one thing for businesses to be short-sighted, but sourcing of critical materials for weapons, and now systems, manufacture has long been a concern of military planners. Yet we’ve heard nary a peep of recrimination over this major blunder. I wonder why.”

None of the responsible generals made intemperate remarks to a Rolling Stone reporter. Seriously though, military policy in the US has been a fucking disaster for a while now and it’s been a long time since a high-level military leader was dinged in any major way for actual crimes on their watch, much less policy failure. Who was the highest ranking officer charged with anything for Abu Ghraib? Janis Karpinsky? She was demoted from O-7 to O-6, thats it, and she was a base commander, not a policy chief.

No matter how great the disaster—-in relation to Iraq alone, consider the flawed intelligence used to justify the invasion, the bungled occupation, and the billions of “reconstruction” dollars squandered or stolen as a result of incompetence or blatant corruption—-senior officials operate on the implicit assumption that they are immunized from accountability. In May 2007, in a stinging critique of post-9/ll military leadership, Army Lieutenant Colonel Paul Yingling wrote in “Armed Forces Journal” that “a private who loses a rifle suffers far greater consequences than a general who loses a war.” Yingling is correct—-and one could easily broaden his indictment to include high-ranking civilians. A Pentagon file clerk who misplaces a classified document faces stiffer penalties than a defense secretary whose arrogant recklessness consumes thousands of lives.
–Andrew J. Bacevich, The Limits of Power

HA! Suuuureee after cutting off the rare earths to Japan and the US without warning? The cat is out of the bag, No credibilty dealing with China now on the issue of rare earths, or anything for that matter.

After being the last great dynasty empire ( few thousand years of land and resources usage ), being raped for hundreds of years by the mercantile west ( fresh legs ), the one bloke that supported the west vis-à-vis and was hung out to dry ( island holiday ), is cornered and attacked by the worlds bankster MSM and you have a problem with their distribution of their national resources…really.

Are all the hyper capitalistic wests problems due to the east…really? Whom knocked on whos door..eh.

I honestly get no huge thrill out of being vulgar (believe it or not). But however there are certain times when only certain words convey the point, and I have only this major point to make on the topic:

WHEN AMERICA STOPS NEGOTIATING AND ACTING LIKE A PUSSY WITH CHINA, CHINA WILL STOP TREATING AMERICA LIKE A PUSSY.

That means capital flows, that means currency exchange, that means trade, that means North Korea.

It means everyday they delay or hike prices on rare earths is another day cheap Chinese goods get rejected at the ports. WHO DO YOU THINK WILL BLINK FIRST??? The country with zero U.S. Dollars coming in, with oceanside city businessmen who crap their pants if they have to pay one jiao more per hour in labor??? Or the country missing Chinese shirts at Wal-Mart where the buttons and zipper break two days after the redneck idiot brought them home???

That means acting like a country with manhood. Not a country raised by circus freak reality television shows, religiously staying tuned to vote for the fat girl who is the daughter of the evangelical psycho politician who passed laws to shoot bears from helicopters and telling us she is a “Momma Bear”.

The thing you don’t seem to understand, friend, is that the pro-China policy in the US is the policy of corporate America who has offshored 6 million+ jobs there in the past decade. To close the doors to “chinese” goods is to close the doors to everything that Walmart sells.

Paul,
I know this may come as a shock to you, but there are many countries who would love that business. India and Bangladesh immediately pop to mind.

It’s a matter of resourcefulness and pressing the situation as far as it needs go. There is NO MONOPOLY on crappy goods produced by uneducated villagers. And I don’t even need an equation from an economics book to make that point, because it is apparent on the face of it.

How many high-tech products to we get from the Chinese??? VERY FEW. The i-Pod comes to mind. Am I to believe that Vietnamese couldn’t make an i-Pod as well as the Chinese?? At most at a SMIDGEON above the cost. I think Steve Jobs and the Apple shareholders can afford that, if I may be so bold to say. And I’ll tell you another thing, Vietnamese aren’t exactly thrilled about Chinese power either. I think the laws can be passed that any further manufacturing expansion (new plants to increase capacity) of i-Pods or other products, extremely strong incentives are given to reward manufacturers that choose whatever the SECOND BEST COST OPTION is to China.

All of these things can be done more easily than first appears when we choose politicians like Alan Grayson instead of Wasilla Psychos with taxidermy bears as their Presidential running mates.

Seems like somewhere along the way I remember reading (could it have been on Brad Setser’s blog?) that in some years China’s purchase of T-bills exceeds its trade surplus with the United States.

Crude oil, petroleum products and fuel oil by far account for the lion’s share of the United States’ trade deficit. In September 2010, for instance, according to the U.S. Census Bureau they accounted for 47% of the U.S.’s trade deficit.

So China not only totes the note for goods it sells the U.S., but in some years provides the U.S. with financing to sate its voracious appetite for oil.

As Paul is trying to point out, it’s more complicated than some Manichean dualism of us vs. them.

I remember reading (could it have been on Brad Setser’s blog?) that in some years China’s purchase of T-bills exceeds its trade surplus with the United States.

Crude oil, petroleum products and fuel oil by far account for the lion’s share of the United States’ trade deficit. In September 2010, for instance, according to the U.S. Census Bureau they accounted for 47% of the U.S.’s trade deficit.

So China not only totes the note for goods it sells the U.S., but in some years provides the U.S. with financing to sate its voracious appetite for oil.

As Paul is trying to point out, it’s more complicated than some Manichean dualism of us vs. them.

DownSouth,
Again, all of this talk of the Chinese selling off US Treasuries is garbage. It’s like you saying you are going to sell your house off underpriced to F*ck your neighbor. It will NEVER happen. It is their number 1 reserve. They bought the U.S. dollar because they trust it will be paid off. Where are they going to store their wealth?? Cut a deal with a Saudi Sheik??? The Chinese wouldn’t trust an A.r.a.b. with their greasy noodles for 5 minutes while they went to use the can.

Ted K said: “They bought the U.S. dollar because they trust it will be paid off. Where are they going to store their wealth??”

You think that explains it all? Could part of the Chinese government’s motive in buying U.S. Dollars in such massive quantities be to drive up the demand for Dollars, thus keeping the Dollar overvalued and its own currency cheap in relation to the dollar? This would give Chinese manufacturers, since their goods are priced in Yuan, a competitive edge. Couldn’t this be another way, in addition to direct government subsidies to Chinese manufactures, for the Chinese government to achieve a mercantilist policy?

If the Chinese government stops buying Dollars then the value of the Dollar plummets. The Yuan gets expensive. This makes Chinese exports, priced in Yuan, more expensive to American consumers who buy Chinese-made goods with Dollars. This in turn adversely impacts the ability of Chinese manufacturers to sell to American consumers.

If the Chinese government stops buying Dollars, how does this affect the value of its massive horde of Dollars? I would guess the effect would be negative. Look at it this way. The Chinese government can now use 1000 of its Dollars to buy about 12 barrels of oil. If the Chinese government ceases to buy Dollars, the price of oil denominated in Dollars will invariably rise. So for its 1000 Dollars the Chinese government could only buy, let’s say, 10 barrels of oil.

So I don’t see buying Dollars as being a particularly good store of wealth.

The policy of the Chinese government seems to be to prioritize domestic production at the expense of domestic consumption, both present and future. I don’t know how wise a policy this will prove to be, but it does comes at a cost.

Does anyone think the Chinese fail to appreciate the power of being the lender of last resort? They accept our fiat money, we accept their shit that falls apart. Everyone attempting to manufacture elsewhere goes broke. Does anyone see a happy ending to this scenario? Rare earths ain’t the problem. Incidentally, what are they used for?

This question by Jake Chase highlights exactly my point about reading a quality newspaper at least twice a week. This gets to a crux point about military preparedness, and yet it is a complete mystery to him. It frightens me to wonder how many Congressmen are just like Jake here.

“..His proposed solution was for surplus countries to voluntarily allow their exchange rates to rise and accept a reduction in exports, so that deficit countries—e.g., the US—could grab a bigger share of stagnating global markets. He even suggested some mechanism to punish surplus nations that refuse to go along with the US recipe for global economic “rebalancing.”No voluntary and peaceful agreement between capitalist nations to redivide the world economy is possible, especially under conditions of a global crisis that precludes a return any time soon to previous growth rates. Bernanke speaks for American capitalism, which is seeking to exploit the privileged position of its currency as the primary reserve currency to offload its own decline and crisis onto the rest of the world.”

We are dealing with two quite different ideas of what the proper role of a financial system should be. Commercial banks in the West have created most credit for speculation and asset-price inflation over the last thirty years, not to fund capital formation and industry. The guiding idea of a public-sector bank is to promote long-term investment to raise productivity, output and employment. This is what has enabled China to succeed so rapidly while Western economies have let themselves be financialized. The Baltics, Iceland and now Ireland are examples of the disaster that financial neoliberals cause when given a free hand.

The moral is that China’s bank success – and its attempt to avert U.S. currency raiding and arbitrage speculation seeking to loot its foreign reserves – should be emulated, not accused of being economic warfare.

Makes sense to me.

The United States—-government of the banksters, by the banksters and for the banksters.

The collapsed housing bubble is now followed by commodity bubbles fueled by “reckless” QE2, which is flowing directly out of the US into emerging markets. It’s no longer possible to allow that Ben Bernanke and crony banksters do not really comprehend the damage they are doing; the same goes for the military, that their strategy of violence does not directly beget more violence. Is this really ignorance, fear, or venality? It’s increasingly difficult to avoid concluding the latter. There’s a limit to forgiving the ignorance of aristocrats and their generals.

Just ask your car dealer where their product is made. Your Ford or Chevy is more likely made in a foreign country. Or the parts are manufactured overseas and assembled here.
I find it amusing that everyone is trying to maintain the status quo. Looking for investment opportunities in a rigged system. Looking for some political wisdom in a rigged system. I’m sorry, the kind of change required will only be found after the whole house of cards collapses. When people start to engage their responsibilities, wake from the SOMA of main stream media and get involved in their communities. Looks like it may evolve into communes like the Israelis have perfected. Government on a large scale is doomed, yet we still feel we must be the world’s enforcer. No, it’s time to get past American Myths, and begin a new community based approach to life. That is if you are not still interested in ripping off your neighbor for a few bucks. You know the Dog eat Dog kind of thing were the other guy is the sucker, and not a human being.

“I’d like to know whether heads have rolled at any defense ministries over the rare earths issue.”

They seem to be surviving even bigger problems, but even so I think this will be more than a minor nuisance.

My job for most of the 80s was designing high performance DC permanent magnet servo motors for the aerospace and defense industry. They are used in inertial platforms, stabilized platforms for pointing&tracking, weapons fire control systems and things like fin actuators in smaller missiles like Amraam.

So you find them in everything from military satellites, spy plane cameras, aircraft radar, long range nav systems, FLIR pods on helicopters, TV camera pointing and stabilization systems on fighter planes (that’s how we get those dogfight films), tank fire control systems (we aim and shoot on the run now), and some missile and smart bomb guidance systems.

The two magnet types used are either samarium cobalt or neodymium iron dysprosium.

Well….In that case how could anyone blame China for curtailing the supply of these elements..How dumb would they be to supply components necessary for weapons which ultimatly will be pointed at themselves??

Another interesting aspect is that China spends only a small fraction on it’s ‘defence budget’, compared to the United States.

This is not a life threatening denial of goods by China, it is merely a minor inconvenience to arms manufaturers.

And this prediction, written in the pre-crisis days of 2007, seems to have been clairvoyant:

U.S. as Renegade; the Militarisation of Energy Policy

The same applies for the U.S., which must surely begin to assume its own international monetary obligations if it is to demand the same of its Asian creditors. The U.S. has been perfectly happy to accede to the current state of affairs in spite of the immense economic damage it has inflicted on its domestic manufacturing sector (and the concomitant evisceration of its middle class) because it has provided the country with a cheap form of war finance, a particularly important consideration as it has gradually militarised its energy policy. If one includes America’s array of privately outsourced services along with a professional permanent military, the costs run around three-quarters of a trillion dollars a year. Chinese, Japanese and other central banks of East Asia via Bretton Woods II indirectly finance this cost. Since these countries also indirectly compete with the U.S. for the same energy resources, we have a paradoxical situation in which they are in effect “feeding the hand that bites it.” This is inherently unstable as the foreigner eventually realises that the provision of capital to a country engaged in war enables that country to invest more in military equipment—equipment that can ultimately be used against them. In such circumstances, America’s external creditors will decide that they would rather invest the accumulated current account proceeds in their own military jets and equipment for themselves. That is to say, they would prefer to own the jet rather than finance it for the U.S. Then the “magic” of Bretton Woods II disappears.

Defense-oriented writers and some retired defense officials have warned for years about America’s dependence on foreign sources for rare earths (China), computer chips (China and Taiwan), steel, mundane equipment such as clothing, small arms (Belgium), etc. They have also criticized the repeated sales, post-Cold War, of America’s strategic stockpiles of industrial metals and gases, medical supplies, etc.

These policies went ahead for three reasons:

1. Globalization advocates who viewed “interdependence” between nation-states as a way to prevent war and force international cooperation. Interdependence theory posits that, if, for example, China has something vital to our military, the US would be less likely to go, or be able to go, to war with China. Similarly, the US and Europe would be forced to cooperate due to our reliance on European defense contractors. Belgian arms manufacturer Fabrique Nationale d’Herstal (and its US subsidiaries such as Winchester and Browning) makes most of our small arms. http://en.wikipedia.org/wiki/FN_Herstal When Belgium threatened to put out an arrest warrant for Bush administration officials over the Iraq war, the Bush administration threatened to cancel arms contracts with Belgium. Since making weapons for the Iraq war was immensely profitable, Belgium dropped the matter.

2. “Just-in-time” inventory practices, popular in industry, were brought to the Pentagon by successive administrations. Donald Rumsfeld was a major supporter of buying supplies and weapon components, as they were needed, from the lowest (or most politically connected) bidder. Rumsfeld believed that it was inefficient to keep inventories or have the military handle its own logistics. Small businesses, whose owners sometimes expressed open hostility for the US, were also employed to meet diversity requirements.

3. The post-Cold War sale of strategic stockpiles held balance the budget and offset the costs of implementing Base Realignment and Closure Commission recommendations.

With respect to the first reason, technological innovation usually trumps scarcity. During World War I, Britain cut off Germany’s supply of nitrates (needed for fertilizer and making ammunition), opiates such as morphine, rubber, and other supplies. Unable to break the British blockcade, Germany convinced its ally, Turkey, to grow opium for it. German scientists also found ways to convert inactive opium alkaloids into usable analgesics. Thebaine, for example, was converted into oxycodone, the active ingredient in Percocet and Oxycodone. http://en.wikipedia.org/wiki/Oxycodone#History A completely synthetic opioid, methadone, later came out of this research. A German scientist, Fritz Haber, solved Germany’s nitrate problem by developing a way to extract nitrogen from the atmosphere. He went on to head Germany’s chemical weapon program, which further reduced Germany’s need for nitrate-based explosives. http://en.wikipedia.org/wiki/Fritz_Haber Germany also undertook massive programs, used to great effect during WW II, to develop synthetic fuels, rubber, and other materials. The synfuel technology, commonly called the Fischl-Tropf process, was later used by South Africa to reduce the effect of economic sanctions over its apartheid policy.

Lithium isn’t really a rare earth (rare earths are heavy atoms), tho it has big demand now because of lithium battery technology.

Rare earths aren’t really rare either. The problem with producing them is they don’t exist in concentated ore. You have to process a huge amount of ore. The processing is difficult and is a big safety and enviromental concern due to use of lots of nasty acids and things. This also makes them labor intensive and expensive to produce.

None of these so-called rare earths are rare, they are just nasty to mine and purify, lots of environmental issues. A lot of places in the world have them, but no one wants the attendant pollution. Would take time to ramp production back up, the estimates I’ve seen are 5 years.

YS: “Yet we’ve heard nary a peep of recrimination over this major blunder. I wonder why.”

The United States does not have an oil company, nor does it have a mining company. The United States has no banks; and it has no control — whatsoever — over its fiat currency.

So, even if the US had oil and mining companies, it would have no way to finance the extraction of rare earth minerals, not so rare earth minerals, or petroleum, because it does not have access to its own money.

The United States cannot formulate plans because it has nothing to formulate plans with. In all matters related to our future energy needs, the US is as helpless as a blind kitten lost in a driving snow storm.

Now, do the masses need to know this? Being $13.8 trillion in the hole, I’d say they’ve got enough troubles. Better to keep things quite — let the end times sneak up on them, nice and quiet.